The surge in yields has dominated financial headlines in recent weeks, with a rise in inflation finally on the horizon after a decade’s worth of work from the Fed. This, paired with increasing optimism for the economic reopening and recovery, has seen treasury yields pop to multi-year highs with widely felt reverberations in the stock market.
From a high level, a higher rate environment is unfavorable to growth, i.e., tech, stocks, as it makes it more expensive for them to borrow while also lowering the present value of their future revenues. Considering how many of them saw triple-digit percentage moves in 2020 off the back of a very far-sighted Wall Street, it’s not surprising to see them lagging so far this year compared to non-growth stocks.
Of this latter group, among the most favorably exposed to an increase in rates are banks. Much of their core business involves lending at a higher rate than what they pay on deposits, so when borrowing rates are close to zero, their margins are too.
We need only take a look at some of their stock charts to see what this paradigm shift means and in the grand scheme this increase in rates is only getting started.
Shares of JPMorgan (NYSE:JPM) passed back above their pre-COVID highs last month as part of an impressive rally that hasn’t gone unnoticed. It means the stock is now up more than 100% since this time last year, with about 20% from this year alone so far. A solid beat on their Q4 earnings in January set them up well and shares are now trading at all time highs.
It’s considered one of the more well-diversified of the big banks and has done extremely well under the stewardship of CEO Jamie Dimon. They have a solid dividend yield of more than 2% and investors are expecting them to resume their multi-billion dollar share repurchase program in the coming weeks.
With macro factors also lining up, there’s not a lot to dislike about JPMorgan right now.
2. Wells Fargo
Though long the laggard of the big banks, Wells Fargo (NYSE:WFC) has been running with the best of them in recent months. Their shares are up close to 100% since November in what is fast turning into their best rally of the past decade.
They’ve been dogged by one scandal or another for much of that time, which has made them underperform the broader market, but investors are clearly getting behind them now. As rates increase, things start to look rosy again. For investors on the sidelines, it’s easier to ignore a stock’s history and to instead focus on the upside potential.
Even though it’s lagged the other two banks on this list on anything more than a six-month timeframe, Wells Fargo shares are actually leading the three of them in returns since November.
3. Bank of America
They have a way to go yet before reclaiming 2006’s all-time highs, but shares of Bank of America (NYSE:BAC) are looking good these days as they trade at their highest point since 2008.
Q4’s revenue was down 10% year-on-year when reported in January, but the subsequent dip was quickly bought up. It looks like investors are more than willing to overlook a blip like that in the face of much stronger tailwinds like rising rates. The 30% shares that have rallied since then is a testament to that.
It can boast of a strong balance sheet and a consistent track record of profitability. Like its peers, there’s a juicy enough dividend yield to entice investors in from the sidelines too. A price-to-earnings ratio of 20 makes for a nice addition too to any portfolio that’s still a little heavy on the growth side of things.Leave a comment